Competition Policy for Developing Countries: A Long-Run, Entry-Based Approach

Article excerpt

I. INTRODUCTION

As developing nations implement structural reforms designed to stimulate economic growth through greater reliance on the market system, concerns regarding competition policy naturally arise. These nations have a unique opportunity to create new conceptions of competition policy designed to promote the competitive process and foster democracy.

Competition policy should reflect the realities of the international marketplace where competitive advantage in large part stems from process and product innovation. Competition policy also should utilize recent economic and political learning and the experiences of competition authorities in industrialized countries who have been enforcing and interpreting different versions of competition policy for the last 50 years. However, competition policy also should reflect the conditions that prevail in most developing countries (nascent democratic institutions; minimal technological bases; small domestic markets; shallow finance; limited judicial and bureaucratic capabilities; and histories of activist states characterized by public ownership of industry, extensive government regulation, and pursuit of industrial policies). For these and other reasons, policymakers should not conceive of appropriate competition policy as a simplified version of extant antitrust regimes.

This paper develops the rationale for an entry-based competition policy focused exclusively on eliminating or mitigating governmental, natural, and artificial barriers to entry. Based on the proposition that entry is the essence of competition, this policy is designed to promote the competitive process, limit rent-seeking opportunities, and further the process of democratization. An entry-based competition policy can provide the foundation for a democratic market economy wherein competitive pressures hone production efficiency and stimulate product and process innovation fundamental to international competitiveness and economic growth.

II. GOALS OF COMPETITION POLICY

Developing countries face a difficult challenge as they attempt to design, implement, and enforce competition policy. The difficulty arises in part because of uncertainty regarding the ultimate purpose of such policy. Competition policy can serve two distinct goals. It can promote competition and/or foster democracy. Competition policy also can promote broader social and economic interests including regional development and industry and export promotion. However, other branches of public policy are better suited to promote these public interest objectives (see Hay, 1991, p. 60).

A. Promoting Competition

The goal of promoting competition is elusive. Well-intentioned authorities can and do interpret this goal very differently. Three distinct views of the nature of competition currently influence competition policy and its enforcement.

Recent U.S. enforcement of antitrust laws reflects the influence of the free-market Chicago School of thought (see Demsetz, 1979, pp. 47-53; Bork, 1979). This view presents competition as a process, a struggle for survival, wherein the fittest, most efficient firms prosper and the less fit, less efficient firms are forced out of the market. Concentrated market structures and even dominant-firm market structures that result from this process are assumed to be efficient and to generate maximum social welfare. (Similarly, less concentrated markets that may evolve in other sectors are assumed to be efficient markets as well.) Absent government-created barriers to entry, large firms in concentrated markets must respond efficiently to changing market conditions or go the way of the dinosaur. The threat of entry by innovative newcomers forces incumbents to enhance production efficiency and to pursue product and process innovation. When government action does not impair entry and exit, the competitive process will result in efficient outcomes.

According to this school, policymakers impede the competitive process by prohibiting business practices that enhance efficiency and innovation or by punishing firms that have attained a large market share by virtue of superior efficiency or innovation (see Rill, 1991, p. …